Paul Voloudakis and Aleka Voloudakis v. Her Majesty the Queen, [1993] 2 CTC 2735, 93 DTC 1068

Sarchuk, T.C.C.J.:—These are appeals by Paul Voloudakis (Voloudakis) and Aleka Voloudakis (Aleka) from assessments of income tax for their respective 1986, 1987, 1988 and 1989 taxation years. The appeals were, on consent, heard at the same time.

In computing income for these taxation years Voloudakis deducted rental expenses in the amounts of $23,164, $12,580.66,$21,793.69 and $27,075 respectively. The Minister of National Revenue (the Minister) reassessed to disallow some of the rental expenses. The Minister also levied penalties under the provisions of subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in the amounts of $66.27 in 1986, $308.72 in 1987, $477.50 in 1988 and $1,797.59 in 1989.

In computing income for her 1986, 1987, 1988 and 1989 taxation years Aleka deducted rental expenses in the amounts of $22,661, $18,685, $20,600 and $27,253 respectively. The Minister similarly reassessed Aleka and levied penalties under the provisions of subsection 163(2) of the Act in the amounts of $2,398.08 in 1986, $2,604.60 in 1987, $5,343.80 in 1988 and $7,876.68 in 1989.

With respect to both assessments the Minister acted on the basis that the expenses claimed, in particular those characterized as maintenance, repair and automobile were not shown to have been incurred by the appellants, or if incurred, were not incurred by them for the purpose of making or producing income from a business or property.

The appellants' position is that the expenses were, in their totality, legitimate and represented moneys expended for ongoing maintenance, repairs and travel.

The appellants were not represented by counsel. Paul Voloudakis testified on their behalf while evidence was adduced for the respondent from Aleka and from Irene Osier, an appeals officer with Revenue Canada.

Facts

Paul and Aleka Voloudakis are the owners of eight rental homes, generally speaking modest in size. All are apparently located in what can charitably be characterized as run-down neighbourhoods. Although each appellant is the registered owner of four properties, for practical purposes they are managed and operated by Voloudakis. He was the person primarily if not exclusively responsible for the leasing arrangements, the collection of rents and for all maintenance and repairs. At all relevant times their income tax returns were prepared by a tax service based on information provided to it exclusively by Voloudakis.

As to the matters in issue Voloudakis asserted that he maintained an accurate record of all income and expenses relating to the properties. A notebook purporting to be such a record was produced (Exhibit A-1). Although Voloudakis said it was a contemporaneous record, it later became apparent that it was prepared for the tax service to enable it to complete their income tax returns. Subsequently during the course of cross-examination Voloudakis made reference to another scribbler containing handwritten entries (Exhibit A-3), which if I understood him correctly, purported to be the primary record of income and expenses from which Exhibit A-1 was reconstructed. In these documents general expenses are shown as a lump sum amount, allocated to each property, but with no further detail. The only expenses separately identified are insurance costs and real property taxes.

Mr. Voloudakis testified that no other material is available to prove the expenses claimed. Three separate reasons were given. First, in all of the years in question he had employed a maintenance man, Joe Walker, whose responsibility was to take care of all of the properties. As such Walker purchased most or all of the materials, and either made the repairs or hired his own people to do so. Voloudakis produced four documents which he alleged were the Walker contracts and four receipts which he said represented payments of $21,600 in 1986; $22,200 in 1987 and $24,000 in each of 1988 and 1989 allegedly made to Walker. Voloudakis maintained that his sole involvement was that of supervision. In a long and convoluted explanation Voloudakis asserted that although Walker had agreed to be a witness he cannot now be located.

The second explanation for the absence of receipts was that many transactions in which Voloudakis himself purchased material or contracted for services were what Voloudakis called “discount deals”. In such transactions the vendor insisted on being paid in cash and would not provide receipts.

The third explanation was that on the advice of his counsel he kept all receipts for a period of not less than five years, but quite recently they were destroyed in a fire.

The high ratio between expenses incurred and gross revenues was asserted to be the result of a predisposition on the part of tenants to cause substantial damage. This conduct on the part of his tenants was not occasional. By way of example Voloudakis alleged that in virtually all of the premises he was required to replace the carpets several times in the years in issue. He stated that every time his tenants left it was necessary to repair windows, to repaint, to have an exterminator in for cockroach and pest control and so forth.

As to the automobile expenses, in 1986, 1987 and 1988 it appears that both acquisition costs and running expenses were lumped together and added to expenses categorized in their respective tax returns as maintenance and repairs. No receipts, vouchers or mileage logs were kept. In 1989 Voloudakis did claim the specific amount of $2,000 as automobile expenses while Aleka claimed $4,000. The latter amount apparently constituted the acquisition price of a new vehicle although on the evidence Aleka was not involved in any aspect of the operation or management of the properties. Nonetheless Voloudakis maintained the automobile expenses were legitimately incurred by them in the course of managing the properties.

The testimony of Aleka provides no comfort to the appellants. She played no role in the operation of the rental properties. She had no knowledge of the amounts expended and on the face of it no knowledge of the income these properties earned. Other than her signature she was unable to identify any portions of her income tax returns for the relevant years.

Miss Irene Osier is an appeals officer with Revenue Canada. She reviewed the notices of objection filed by both appellants to determine their nature. Concluding that additional information was required she spoke to Voloudakis several times. In the course of a telephone conversation on May 6, 1991 she asked him to produce receipts and was told that he had sent them all to Revenue Canada. When she inquired as to the nature of those records Voloudakis terminated the call. He called back approximately one hour later and for the first time spoke of an arrangement with Walker. When Ms. Osier asked for Walker's telephone number Voloudakis stated that he was not sure where he was, then added he may be dead”. Ms. Osier suggested that he try to find Walker and advise Revenue Canada. Approximately one month later Voloudakis called to say that he could not locate Walker at his address and that he must have moved away.

In his subsequent discussions with Ms. Osier, Voloudakis maintained that the amounts he paid to Walker were necessary and reasonable in that it was not uncommon to have to redecorate each of the properties as much as four times a year. He suggested that Revenue Canada look at the properties. Ms. Osier and her supervisor did so. From her testimony I conclude that the residences viewed were in a substantial state of disrepair with little evidence of any work having been carried out on any of the properties for some extended period of time.

Conclusion

It is common ground that the onus is on a taxpayer to prove that the Minister's assessments are wrong. In this case I find that the appellants have not met that onus.

A word first regarding the credibility of Voloudakis. His testimony was in itself quite improbable and unreasonable. In several instances he contradicted himself and in other matters was contradicted by Miss Osier whose testimony I accept. He was on occasion unresponsive and evasive and generally his demeanour did nothing to suggest truthfulness.

By way of example, when asked whether he kept his receipts he responded (at transcript page 2, II. 22 to 24; page 3, Il. 7-19):

Voloudakis: This is the problem. In order to give me receipt, they ask me for $100 more. In order to save this money. . . .

His Honour: Who operates like that? Why would you deal with a person who would charge you $100 extra for a receipt?

Voloudakis: He can give me the receipt, there is no problem. He says in order to give me receipt from $150 he wants $200.

His Honour: Is he the only cockroach killer in Toronto?

Voloudakis: In Hamilton. The prices are about the same. Many of these people, they work when it is regarding cash money, the same way. That happens with them. It doesn't happen all the time, it happens once in a while. When I ask to quote a price it is $180 to $200. If I have five different tenants and I pay these people five times a year how much would it cost regarding one house?

Subsequently in the course of cross-examination counsel for the respondent asked (at page 4, Il. 4-25, t. p. 5, Il. 1-5):

Q. In the years that you carried on your operation, the rental operation, did you keep receipts?

A. I always kept them.

Q. You always kept them. Who told you to keep receipts?

A. The law.

Q. The law told you to keep receipts?

A. In order to claim the income expenses with the first house I bought I asked advice from the lawyer and he said from the day that you start being an owner of this house, you start renting this house, you must keep receipts for $100 to $200 and you must keep it very safe and at the end of the year give it to the bookkeeper. . . .

Q. You must keep the receipts very safe so you kept them in the garage, did you?

A. Because I have a very big bag to keep the receipts.

Q. A very big, bag; how big?

A. A box.

Q. Four feet by two feet?

A. Two feet. All the receipts, l dumped them in there. I would collect all this until the end of the year. The lawyer advised me that all these papers, all the receipts not less than five years. I did just exactly that.

As to the destruction of these receipts he said (at page 2, Il. 8-14):

I was collecting them all into a box and I had them in the garage in a safe place. One or two years ago we are doing barbecue. As I tried to went into that place somehow the wind, fire was propagated and it caught on fire but I have saved a few which I have here, a few of them which II have presented as well at the property tax in Hamilton.

Voloudakis then produced a small plastic bag full of totally indecipherable and unidentifiable charred paper.

Section 230 of the Income Tax Act (the Act) requires taxpayers to keep adequate books and records. Adequate is not defined in the Act but it seems logical to presume that such records should be sufficient or suitable to support whatever the taxpayer is claiming for tax purposes.

I do not reject the possibility that some of Voloudakis' transactions were made on a cash basis, but if that was the case it was particularly important for him to keep some reasonable record thereof. This he failed to do. The notebooks submitted do not contain information recorded contemporaneously and cannot by any stretch of the imagination be characterized as reasonable evidence of such expenditures. Furthermore, in virtually every instance the total amount of expenses allocated to each property appears to have been altered on one or more occasions. Voloudakis conceded that changes had been made but his explanations were, to put it bluntly, lame.

With respect to Walker the purported contracts are in my view spurious. Voloudakis’ testimony in this context, particularly his responses in cross- examination, left me with a strong sense that the receipts and agreements tendered may not have been written by Walker as suggested by Voloudakis.

In cases such as this it is incumbent on an appellant to establish that he did in fact spend the amounts claimed. It would not appear unreasonable in such circumstances to expect that a reasonably accurate record be kept. There is no rule requiring the production of receipts or vouchers in respect of every item, but having regard to the absolute improbability of the evidence of Voloudakis, the absence of some form of supporting evidence is of substantial import. In my view the appellants have failed to establish on a balance of probabilities that the Minister’s assessments were in error.

Penalties

Subsection 163(2) provides:

163(2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty. . . .

With respect to Voloudakis I am satisfied that a substantial portion of the expenses he arranged to have claimed as a deduction in both his own and his wife’s returns were false. This was not the result of carelessness or negligence. Expenses were deliberately inflated to reduce the amount of tax payable. He kept no records other than Exhibits A-1 and A-3 and these provide absolutely no detail or support for the expenses claimed. That the tax service included these expenses as a deduction in both Voloudakis' and Aleka's returns does not speak very well of their integrity, but that is another matter for another day. In my view Voloudakis in the fullest sense of the word “ knowingly” failed to report amounts of taxable income. I am satisfied that the returns reflect Voloudakis’ intention to avoid the payment of tax and that penalties were properly imposed in his case.

Insofar as the penalties imposed on Aleka are concerned I have concluded that they must stand as well. Although four of the properties were registered in her name she evinced no interest in determining the status of affairs with respect thereto. She says she had no knowledge of the nature or amount of expenses being claimed in her return, nonetheless in each of the four years in question she filed the return and certified that the information given in the return is true and correct in every respect and fully discloses her income from all sources.

There is no evidence before me that due to lack of language skills she was incapable of reading or understanding the contents of her income tax returns nor is there any evidence that she was incapable of understanding the relatively simple issues involved, that is accurately stating the revenues earned from her rental properties and the expenses incurred as a result thereof.

Voloudakis in his testimony made it clear that the underlying reason for registering title to four properties in her name was to split income for tax purposes. There is no evidence she was anything but willing to do so. It was her choice to proceed in this manner, and in my view her conduct can only be described as wilful blindness. In these circumstances this amounts to gross negligence.

The penalties were properly imposed. The appeals are dismissed.

Appeals dismissed.